Mediobanca said on Tuesday it had started proceedings for Italy's biggest bank UniCredit to pay coupons on some financial instruments known as CASHES despite a decision to suspend dividend payments.

In order to do that, Mediobanca said it had agreed, as per a UniCredit request, to modify the terms of the contract it has in place with UniCredit as depositary bank for the CASHES.

The CASHES are convertible and subordinated hybrid equity-linked securities, worth 2.98 billion euros (2.66 billion pounds), which UniCredit issued in 2008 to beef up its capital reserves.

The changes to the contract with Mediobanca give UniCredit the option to pay Mediobanca quarterly amounts which will then be used to fund coupon payments on the CASHES even when conditions on dividend distribution and profits are not met.

Mediobanca said UniCredit had informed the depositary bank it intended to make use of this option in relation to quarterly payments on the CASHES due on May 26.

Mediobanca in turn has started proceedings to transfer on such sums in time for the payment of the coupons on the CASHES.

UniCredit said in March it was putting on hold for now plans to pay dividends on 2019 results and buy back shares following a call by regulators for financial firms to preserve capital to support the economy against the coronavirus.

UniCredit said at the time the decision was neutral in relation to the payment of coupons on Additional Tier 1 bonds and the CASHES instruments.

(Reporting by Gianluca Semeraro, editing by Valentina Za and Jason Neely)